While the focus is still on Deutsche Bank, don’t forget about Italy

by Kenneth Schortgen

Over the past two weeks the primary focus by the world’s financial caretakers has been on Deutsche Bank, and its potential to collapse several other institutions through the counter-party risk of its $40-70 trillion derivatives book.  But as the markets have appeared since last Friday to shrug off the German bank’s imminent insolvency problems, little has been mentioned about the other economy in Europe that has an even greater risk of bringing about the next ‘Lehman Moment’.

Over the next month, Italy is expected to vote on a referendum which if passed, would allow Matteo Renzi to institute new reforms that have kept the Italian economy both in stagnation, and austerity since the 2008 financial crisis.  But with several of their major banks teetering on collapse in equal or greater measure to that of Deutsche Bank, the potential of an Italian banking implosion not only threatens the Western banking system, but also the future of the European Union itself.

“An Italian exit from the single currency would trigger the total collapse of the eurozone within a very short period. It would probably lead to the most violent economic shock in history, dwarfing the Lehman Brothers bankruptcy in 2008 and the 1929 Wall Street crash.

— Financial Times

Should the Italian people vote in favor of Renzi’s referendum to change the Constitution it would signal to the EU that Italy is in complete lockstep with Brussels and the Troika, and would fulfill any necessary steps to receive bailout or bail-in funds to save their banks.  However, if the referendum vote fails, and at this time it appears likely that this will be the outcome, it will be a clear signal that the Italian people are more than ready to leave the EU, and become the second, and probably most crucial state, to breakaway from the continental coalition.

Earlier today (Oct. 7) an announcement was made by a former Italian minister that a private bailout of Monte de Paschi di Siena was in the works.  But late this afternoon Zerohedge reported that this plan had broken down, leaving Renzi and the Italian government very few options in staving off its imminent insolvency.

“Monte Paschi private bailout attempt has failed: “former Italian minister is preparing an alternative rescue plan for Monte Paschi”

— Reuters

Perhaps what is most interesting in this unfolding drama is that behind the scenes, Prime Minister Renzi has been in talks with Russia to try to re-invigorate trade that has been lost from the EU’s imposition of economic sanctions.  And what this appears to do under the surface is act as a backup for Italy in case they inevitably decide to leave the Euro and the EU, and have need of an economic boost once they isolate themselves from Brussels.

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